Economic rebound to bring glad tidings for hotel industry

Hotels are back with a bang

The Indian hospitality sector is expected to make a smart comeback this fiscal year. The performance is expected to be as good, if not better, than the salad days before the pandemic. This rejuvenation is strongly backed by a rebound of the global economy from pandemic concerns. This has sharply increased the tourist flows and allowed India to host a plethora of high-profile events. From an economic standpoint, average room rates (ARRs) are poised to rise by 10-15% while hotel industry margins are also expected to improve sharply.

Hospitality growth on multiple fronts

According to Crisil, the ARR (average room rent) of premium hotels grew 13% in FY22 and FY23 but is estimated to double to 26% growth in FY24. That will be the best growth in a decade. Hotel occupancy, a key profitability metrics, has also been on the rise. From a low of 31% in FY21, it went up to 50% in FY22 and further to 72% in FY23. Next fiscal FY24 is expected to maintain this 72% occupancy rate or even better it. However, while the occupancy rate is expected to remain robust, the ARR may either flatten or taper in FY24. That will be more due to competitive pressures and the sharp spike in budget hotels coming up across India. 

What has triggered this fantastic growth for hotels?

Broadly, the growth in the hotel industry's fortunes is linked to 3 factors viz., revenge spending, events, and contact tourism. Most Indians and even people abroad have been exasperated by the financial stringencies imposed by the pandemic. There was a lot of liquidity but not avenue to spend. As hotels get back to regular functioning, a surge in revenge spending is going to be the key.

The second major trigger is events and there are many big events lined up that will attract a lot of tourism flows. The year 2023 will be a special year for India as it hosts a slew of popular events like the Indian Premier League (IPL), G20 Summit, ICC Men’s World Cup, etc. Overall, the MICE (Meetings, Incentives, Conferences, and Exhibitions) factor, combined with the growth of destination weddings is likely to spur demand for hotels in FY24. 

Improved infrastructure like additional airports, better rail and road connectivity will also help. India has been emerging as a hot tourism destination before COVID nipped this industry in the bud. Now people are coming back in hordes. These 3 factors have certainly brought strong tailwinds for the hotel sector, and this exponentiating demand could soon overshadow the supply of rooms. 

Is this growth sustainable, or a flash in the pan?

That is hard to say, but public sentiments can be fickle and take little time to change. While many of the events are real, the revenge spending may not be too real. Irrespective of how market conditions pan out, the hotel industry must constantly strive to constantly reinvent itself. Its challenges are not only from the market but also from others like OYO, which are rethinking the industry with their Airbnb like models. But, for now, the hotels are having a good time and laughing all the way to the bank. One only hopes that is lasts a little longer.